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Currency Crisis and Unemployment: Sterling in 1931

In: Currency Crises

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  • Barry Eichengreen
  • Olivier Jeanne

Abstract

This paper studies the role of unemployment in sterling’s inter-war experience. According to most narrative accounts, the proximate cause of the 1931 sterling crisis was a high and rising unemployment rate that placed pressure on British governments to pursue reflationary policies. We present a model which, in the spirit of the ‘second generation’ approach to currency crises, highlights the conflict between the objective of low unemployment and defence of the currency and show that it can reproduce the main features of sterling’s inter-war experience. Econometric evidence lends further support to the view that the proximate cause of the sterling crisis was the dramatic rise in unemployment caused by external deflationary forces.

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This chapter was published in:

  • Paul Krugman, 2000. "Currency Crises," NBER Books, National Bureau of Economic Research, Inc, number krug00-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8688.

    Handle: RePEc:nbr:nberch:8688

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    References

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    1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    2. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
    3. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    4. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
    5. Olivier Jeanne and Paul Masson., 1997. "Was the French Franc Crisis a Sunspot Equilibrium?," Center for International and Development Economics Research (CIDER) Working Papers C97-095, University of California at Berkeley.
    6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    7. Bernanke, Ben S & Carey, Kevin, 1996. "Nominal Wage Stickiness and Aggregate Supply in the Great Depression," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 853-83, August.
    8. Broadberry, S N, 1983. "Unemployment in Interwar Britain: A Disequilibrium Approach," Oxford Economic Papers, Oxford University Press, vol. 35(3), pages 463-85, November.
    9. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
    10. Snower,Dennis J. & Dehesa,Guillermo de la (ed.), 1997. "Unemployment Policy," Cambridge Books, Cambridge University Press, number 9780521599214, October.
    11. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    12. Robert P. Flood & Peter M. Garber, 1980. "Gold Monetization and Gold Discipline," NBER Working Papers 0544, National Bureau of Economic Research, Inc.
    13. Dimsdale, Nicholas H & Horsewood, Nicholas, 1995. "Fiscal Policy and Employment in Interwar Britain: Some Evidence from a New Model," Oxford Economic Papers, Oxford University Press, vol. 47(3), pages 369-96, July.
    14. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
    15. Hatton, Timothy J., 1987. "A Quarterly Model of the Labour Market in Interwar Britain," CEPR Discussion Papers 186, C.E.P.R. Discussion Papers.
    16. Miller, Marcus & Sutherland, Alan, 1994. "Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?," Economic Journal, Royal Economic Society, vol. 104(425), pages 804-12, July.
    17. Olivier Jeanne., 1997. "The Persistence of Unemployment Under a Fixed Exchange Rate Peg," Center for International and Development Economics Research (CIDER) Working Papers C97-093, University of California at Berkeley.
    18. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
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    Cited by:
    1. Crafts, Nicholas; Fearon, Peter, 2010. "Lessons from the 1930s' Great Depression," CAGE Online Working Paper Series 23, Competitive Advantage in the Global Economy (CAGE).
    2. Eichengreen, Barry, 2003. "Three generations of crises, three generations of crisis models," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1089-1094, December.

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